Open Economies
Entry and Profits in an Aging Economy: The Role of Consumer Inertia
Gideon Bornstein
NBER Working Paper, May 2025
Abstract:
Over the past four decades, the U.S. economy has seen a decline in the share of young firms alongside a rise in the profit share of GDP. This paper explores how population aging contributes to these twin trends through a demand-side channel. The core hypothesis is that younger households exhibit lower consumer inertia -- a tendency to stick with previously chosen products -- than older households. As demand shifts toward more inertial consumers, entry becomes harder, incumbents raise markups, and market share tilts toward larger firms. To quantify this mechanism, I develop and calibrate a firm dynamics model with overlapping generations of consumers who differ in their degree of inertia. Using detailed micro data, I show that younger households are significantly less inertial. The model implies that population aging accounts for 20%-30% of the observed decline in young firms and rise in profits. Reduced-form evidence across U.S. states and product categories supports the model's predictions.
Price-Fixing Cartels and Firm Innovation
Hyo Kang
Management Science, forthcoming
Abstract:
This paper examines the relationship between price-fixing cartels and firm innovation using a data set encompassing all 461 cartel cases and 1,818 firms identified in the United States in the years 1975-2016. A difference-in-differences estimation reveals a positive relationship between collusion and innovation. Colluding firms exhibited increases of 28% in patent filings, 20% in top-quality patents, and 16% in research and development investment. Innovation breadth also expanded by 16%, suggesting that firms explored new technological areas. Once cartels were dissolved, innovation activities reverted to precollusion levels. The effect varied across industries and was more pronounced in fast-growing and patent-intensive industries, underscoring the importance of technological opportunities. Further, the umbrella pricing effect that also benefits noncolluding competitors offers a unique opportunity to unpack mechanisms. Results reveal that the extra financial resources account for at least a quarter of the effect with stronger cartels exhibiting more pronounced effects. Specifically, firms that relied more on internal financing before collusion and that generated higher revenues during collusion showed a greater effect; no evidence was found of capital reallocation within firms. As much as the remaining three quarters of the effect can be attributed to managerial expectations of future profitability. These findings offer insights for managers and policymakers aiming to foster novel innovation although careful interpretation is required given the heterogeneous effects.
America's Housing Supply Problem: The Closing of the Suburban Frontier?
Edward Glaeser & Joseph Gyourko
NBER Working Paper, May 2025
Abstract:
Housing prices across much of America have hit historic highs, while less housing is being built. If the U.S. housing stock had expanded at the same rate from 2000-2020 as it did from 1980-2000, there would be 15 million more housing units. This paper analyzes the decline of America's new housing supply, focusing on large sunbelt markets such as Atlanta, Dallas, Miami and Phoenix that were once building superstars. New housing growth rates have decreased and converged across these and many other metros, and prices have risen most where new supply has fallen the most. A model illustrates that structural estimation of long-term supply elasticity is difficult because variables that make places more attractive are likely to change neighborhood composition, which itself is likely to influence permitting. Our framework also suggests that as barriers to building become more important and heterogeneous across place, the positive connection between building and home prices and the negative connection between building and density will both attenuate. We document both of these trends throughout America's housing markets. In the sunbelt, these changes manifest as substantially less building in lower density census tracts with higher home prices. America's suburban frontier appears to be closing.
Can We Rebuild a City? The Dynamics of Urban Redevelopment
Vincent Rollet
MIT Working Paper, May 2025
Abstract:
Cities increasingly rely on redevelopment -- the demolition and reconstruction of buildings -- to grow and reallocate land uses. This paper studies this process and how it is influenced by land use regulation. I build a dynamic general equilibrium model of the supply and demand of floorspace in a city, which I estimate using a novel parcel-level panel dataset of land use and zoning in New York City. I validate the model using quasi-experimental variation from recent zoning reforms and use it to simulate the effects of zoning changes on construction and prices. I find that zoning is the primary determinant of local supply elasticities and substantially constrains the city's growth, particularly in areas where prices are high and existing density is low. However, because the fixed costs of redevelopment are high and increase sharply with the size of buildings to demolish, relaxing zoning in inexpensive or densely built neighborhoods has limited effects. Furthermore, the welfare gains of relaxing zoning only materialize slowly and largely accrue to households outside of the rezoned area.
Who Benefits from Surge Pricing?
Juan Camilo Castillo
Econometrica, forthcoming
Abstract:
New technologies have recently led to a boom in real-time pricing. I study the most salient example, surge pricing in ride hailing. Using data from Uber, I develop an empirical model of spatial equilibrium to measure the welfare effects of surge pricing. The model is composed of demand, supply, and a matching technology. It allows for temporal and spatial heterogeneity as well as randomness in supply and demand. I find that, relative to a uniform pricing counterfactual in which Uber sets the overall price level, surge pricing increases total welfare by 2.15% of gross revenue. Welfare effects differ substantially across sides of the market: rider surplus increases by 3.57% of gross revenue, whereas driver surplus and the platform's current profits decrease by 0.98% and 0.50% of gross revenue, respectively. Riders at all income levels benefit. Among drivers, those who work long hours are hurt the most, especially women.
The Effect of Non-Wage Competition on Corporate Profits
Ioannis Branikas et al.
NBER Working Paper, May 2025
Abstract:
Most S&P 500 corporations disclose that their profits depend on non-wage competition for worker talent via workplace amenities like work-life balance. We quantify this dependence using a labor market matching model with endogenous amenities. When productive (unproductive) firms provide the amenities demanded by workers at a lower cost, firm quality becomes more (less) dispersed relative to worker quality, which results in higher (lower) firm profits due to competition. This cost advantage is identified with data on wages, worker satisfaction, and firm scale. Calibrating our model to Glassdoor surveys, a 1% increase in workers' non-pecuniary preferences raises firm profits by 0.6%.
Behavior-Based Pricing Under Informed Privacy Consent: Unraveling Autonomy Paradox
Yunhyoung Kim, Haitao (Tony) Cui & Yi Zhu
Marketing Science, forthcoming
Abstract:
The implementation of recent privacy protection regulations mandates that firms obtain privacy consent from consumers before acquiring their private data. This procedure, known as "informed privacy consent," has significant implications for behavior-based pricing, wherein firms engage in third-degree price discrimination based on consumers' purchase history. Before keeping track of consumers' purchasing history for implementing price discrimination, firms must seek consumers' privacy consent, enabling consumers to autonomously make decisions regarding their data. These endogenous privacy decisions are shaped by several factors, such as the cost of risk from privacy breaches, anticipation of future utility changes driven by price discrimination and personalized products, and rewards for opting in. Although consumers strategically decide their privacy choices to get the best future utility, in equilibrium, none of them exclusively benefit from their choices, which leads to a decrease in overall consumer surplus even with the enhanced utility from personalized products and rewards for opting in. Firms, despite the cost of providing the rewards, earn higher profits by exploiting consumers' strategic privacy decisions, which alleviates price competition. Our findings underscore an autonomy paradox that empowering consumers to make informed decisions about their privacy rights does not necessarily lead to increased consumer surplus. This result implies privacy regulations founded on informed consent may lead to unintended consequences.
Dealer Financing in the Subprime Auto Market: Markups and Implicit Subsidies
Mark Jansen, Samuel Kruger & Gonzalo Maturana
Management Science, forthcoming
Abstract:
Do dealers use their financing discretion to charge higher interest rate markups to high-risk customers? We use unique transaction-level data to examine finance and vehicle profits in the subprime auto market with three main results. First, financing subprime customers is costly for dealerships because of loan discounts that are only partially offset by proceeds from interest rate markups. Second, financing is costliest to dealers for deep subprime customers with low credit scores and low incomes. Third, instead of offsetting financing costs, vehicle markups are lowest for deep subprime customers. Finance margins and vehicle markups are also positively correlated more generally.
Collusion through Common Leadership
Alejandro Herrera-Caicedo, Jessica Jeffers & Elena Prager
NBER Working Paper, May 2025
Abstract:
This paper studies whether common leadership, defined as two firms sharing executives or board directors, contributes to collusion. Using an explicit measure of labor market collusion from unsealed court evidence, we find that the probability of collusion between two firms increases by 12 percentage points after the onset of common leadership, compared to a baseline rate of 1.2 percent in the absence of common leaders. These results are not driven by closeness of product or labor market competition. Our findings are consistent with the increasing attention toward common leadership under Clayton Act Section 8.
Divided we fall: Congressional cycles, the stock market and firm performance
Joshua Livnat, Amir Rubin & Dan Segal
Journal of Corporate Finance, June 2025
Abstract:
This study examines the impact of partisan control of the United States Congress on corporations and the economy. The findings indicate that economic performance is weaker when neither party holds a majority in both chambers of Congress, resulting in a divided Congress. We propose that this outcome may be attributed to a decrease in the level and quality of regulation during divided Congress terms. To analyze the immediate effects of regulation on the economy, we leverage congressional recess periods as a source of exogenous variation. Consistent with the conjecture that the composition of Congress affects the economy through its regulatory activity, we demonstrate that a divided Congress negatively impacts economic performance when Congress is in session but has no significant effect during recesses (when regulation does not occur). In conclusion, congressional cycles and the presence of effective regulation are shown to be crucial factors influencing economic activity.